Shamsul Huq Zahid
The stock market, after a continuous plunge for weeks, has bounced back. It is difficult to say how long the reverse trend would last.
The decision, having strong support from the government, to float a Tk. 50 billion open-ended mutual fund by the Investment Corporation of Bangladesh (ICB), four state-owned banks and two insurance companies soon, apparently, has helped the market look up. But did the news about the government decision to introduce the buy-back of securities by listed companies anyway influence the market last Tuesday? If yes, that would be yet another addition to the long list of wrongs committed by so-called investors for past few months.
The way the finance minister disclosed the decision to incorporate the provision into the Companies Act allowing the listed companies to buy back their stocks, it sounded something big as far as stock market is concerned. The disclosure was also supplemented by the president of the association of publicly listed companies. However, the buy-back arrangement is not a big deal as it has nothing to with the
current developments in the Bangladesh capital market.
The buy-back arrangement is there in many countries, including neighbouring India. The Securities and Exchange Board of India (SEBI) in 1998 introduced the buy-back arrangement through a regulation.
In fact, the arrangement does not anyway help the investors in distress. The system is not meant to force a listed company to buy-back from investors the shares purchased at higher prices. Nor it can compel the company to buy-back shares if the market prices of the same go below the face value.
The arrangement is for voluntary buying back of stocks by the companies concerned under certain circumstances. In fact, the buy-back can mean strengths or weaknesses of a company, depending on the situation. When a company feels threatened by a syndicated move to take over the controlling stakes by others, it can offer high prices for stocks to maintain its control over the majority stakes. A company, having surplus fund, can opt for expansion or diversification or buying its own shares from the market. Investors should have no reasons to be suspicious if the company offers less than the real worth of the share. But if the offered price is more than the real worth, the investors need to be cautious. They should go through the financial statements of the companies concerned thoroughly to understand the hidden agenda.
Then again, if a company's stock is highly undervalued and the company has surplus fund to dispose of, it can use a part of that fund for buying back its own stock for liquidating the same. Such a move helps the shareholders in terms of increased return on their investment.
But for a company with enough of surplus fund, the ideal move should be to increase the rates of dividend and please its shareholders. This also adds to the name and fame of a listed company.
Incorporation of the provision for the buy-back of stocks in the Companies Act of Bangladesh is justified for any company needing to do so might face problem, in the absence of the necessary legal provision. This is, however, not anything urgent under the prevailing circumstances. The government and the securities regulator have some more urgent tasks to do, including that of stabilizing the market and nabbing the masterminds of the recent market crash. There are lots of lacunae in the securities law that should also be removed immediately.
What is more important is reforming the securities regulatory body thoroughly, in terms of manpower, logistics and independence. The Securities and Exchange Commission should not be a body to carry out overt and covert directives from the government and requests from quarters having strong links with the power-that-be.
As far as the introduction of buy-back system is concerned, the SEC should first ensure submission of quality and authentic balance-sheets by the listed companies. Most investors here do not have enough confidence in the financial reports submitted by a good number of companies from time to time. However, the use of buy-back system in Bangladesh conditions is likely to be highly occasional, at least, in the near future.
Zahidmar10@gmail.com
Buy-back: Necessary but need not be a priority
Shamsul Huq Zahid | Published: March 09, 2011 00:00:00 | Updated: February 01, 2018 00:00:00
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